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Finance allah shmoop What is imputed interest rate Imputed guest

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at or presumed based on x y and z that's

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the foundation of an imputed interest rate and its chief

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cheerleader Yep It's the i r s the tax people

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those guys you just love to hear from Why Well

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because taxes need to be collected Right We have pork

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to buy for politicians Come on people Get with it

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So we have a zero coupon bond here We bought

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for five hundred bucks which comes do or pays off

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in ten years for a thousand dollars on lee Remember

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Zero coupon bonds don't pay any interest along the way

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They just pay a one time end of period amount

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which includes interest and principal The irs taxes Bondholders imputed

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interest Yes like gains based on whatever interest rate is

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imputed by the terms of the deal So in this

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case remember that rule of seventy two thing so many

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years to doubled about it into seventy two and all

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that Yeah So in this case the money takes ten

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years to double that's ten into seventy two paying seven

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point two percent interest per year Compound it So the

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irs would take as an imputed interest Five hundred box

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times seven point two which is thirty six dollars of

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taxable imputed interest games And they would take that each

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year and you'd pay that each year on your taxes

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So if you owned this bond and we're living in

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a forty percent marginal tax bracket blue state which you

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livin bitterly even though you got no cash interest from

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this bond will you'd suffer a cash tax hit of

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forty percent of thirty six or a bit under fifteen

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dollars each year as you went along So that's the

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bad news you pay the cash up front The good

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news is that when the bond finally came do that

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decade later for that grand well you have already paid

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the taxes along the way And when taxes are already 00:02:01.504 --> [endTime] paid well we impute you'll be a happier camper

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